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June 14, 2018
Dan McGraw, Judith Schroeter and ClearBlue Market’s Nicolas Girod
Senior Market Strategist, Business Director, Head of Trading and Research
How Ontario’s election can shape the future of WCI
analytics.icis.com
About ICIS
ICIS is the leading provider for global carbon market analysis
We cover the carbon markets in the EU (our home market), California/Quebec, RGGI, China and international offset markets.
Our products and analysis includes:
Price forecasting: short-, mid-, and long-term horizon
Estimated trading activities of compliance companies
Forecasting of fundamental data, e.g. emissions
Qualitative analysis, with a focus on policy developments
Market relevant news from journalists
copyright © 2018 ICIS
Agenda
1) Recap of the Ontario election
2) What are Doug Ford’s options?
3) Mid and long-term impacts of election
4) ClearBlue Market’s insight
5) Questions
Recap of the election
copyright © 2018 ICIS analytics.icis.com 5
Election results of June 7
Progressive Conservatives won 76 of the 124 seats in the legislature
Party needed 63 seats to win a majority
PCs found necessary support in the Toronto area to claim victory
NDP support failed to materialize as pre-election polls suggested
Allowance price had been gaining on NDP polling figures
Ford will become the next Ontario premier after forming a government
He has already met with Lt. Governor about the transition
Expected to take two to three weeks
Ford has not made any additional statements about cap-and-trade or linkage
copyright © 2018 ICIS analytics.icis.com 6
Market reaction to the Ontario election
$14.60
$14.80
$15.00
$15.20
$15.40
$15.60
copyright © 2018 ICIS analytics.icis.com 7
How polling figures impacted CCA development
$14.85
$14.90
$14.95
$15.00
$15.05
$15.10
$15.15
$15.20
$15.25
$15.30
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PC NDP CCA Price
Looking ahead: What are Doug Ford’s options?
copyright © 2018 ICIS analytics.icis.com 9
Linkage agreement
Agreement is not legally binding
De-linking process gives two potential exit points for Ontario
Exiting member will give a 12 month notice (July or December 2019)
Departing jurisdiction will endeavour to match exit date with the end of a
compliance period (December 2020)
Linkage agreement does not require obligations to be maintained upon exiting
Agreement would remain in effect for other members
ARB has previously said prior issued allowances/offsets from exiting
jurisdictions would still be valid
ARB could evaluate and take regulatory action as a result of de-linking
copyright © 2018 ICIS analytics.icis.com 10
Leave immediately
with no obligationsStay in the linked
program
Leave at a future
date with
obligations
Fulfills
campaign
promise
Wins over
business
sector
May
violate
federal
policy
Increases
cost to
Ontario
Reduce
legal costs
Enables
Ford to
fight Fed
Maintains
business
costs
Fails
campaign
promise
Minimizes
costs
Increases
revenue
Flip flop
May lose
business
sector
What will Doug Ford Do?
Mid and long-term impacts of the election
copyright © 2018 ICIS analytics.icis.com 12
Market impacting factors
Leave immediately without obligations
Immediately create a glut of allowances in the CA/QC market
Could entice Ontario entities to liquidate positions
Reduce auction participation and demand ahead of two largest auctions in program history
Potentially failed auction would pull 66m allowances from the market via 24-month policy
Would require ARB to remove excess Ontario allowances via bank adjustment
Leave at a future date with obligations
Lower long-term supply-demand balance, but minimum near-term impacts
Ontario entities would likely still buy in auctions and hold allowances, but not take long positions
Would require ARB to remove future vintage allowances
Stay in the linked program
Keep supply-demand balance and forward price curve the same
Status quo
copyright © 2018 ICIS analytics.icis.com 13
Impact of Ontario’s departure on 2030 price curve
Base Case Price Ontario Withdrawal 1 Ontario Withdrawal 2 Ontario Withdrawal 3
ClearBlue Markets insight
About ClearBlue
15
Select ClientsThe Team
Awards
Ontario
Election
Impact
16
The Ontario Roller Coaster
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Compliance Timing Impact
Market Behaviour (Allocations tend to be bearish, Compliance Bullish)
Sep14
Mar15
Sep15
Mar16
Sep16
Mar17
Sep17
Mar18
Sep18
Mar19
Sep19
Mar20
Sep20
Mar21
Sep21
TIMELINEWCI
CA QB ON
CA/QC CP2 CA/QC CP3
ONCP1
Allocation
Compliance
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Ontario Cap & Trade- What’s Next?
Follow the rules
Do not follow the rules
Impact limited on the market
and on the behavior of
compliance entities, except
some probable delays on investments
Will impact the behaviour of
market participants and it is
currently difficult to asses
how. In most scenarios, this
could have a bearish impact on prices.
Based on the ON/CA/QC
agreement, the
withdrawal procedure
should matchNovember 2021 Deadline
Will entities need to
surrender allowances?
NO: What happens to
allowances received for
free or purchased?
YES: When is the
deadline?
Ontario Cap & Trade - What’s Next?
The PCs in power bring uncertainty and questions around Cap & Trade. There are immediate deadlines that
are essential to the program:
WCI Auction #16 Notice
The notice for the next WCI Auction #16 is scheduled for June 15th
Will Ontario be participating in the WCI Auction #16 on August 14th?
Will the MOECC under the PC government contribute to the auction notice?
Transition Period
1. Ford will need to select a new cabinet (anticipated to be completed by end of June / who will be the
minister? Will ministries be combined - MOECC to MOEE?)
2. Once the legislature is recalled Ford will deliver a “speech from the throne” laying out policy priority areas
(could be as early as July for a brief summer session)
3. One of Ford’s priorities is to address Ontario’s fiscal situation with a third party audit which could delay
decisions until at least September
The coming months will be important to monitor for the future of Ontario’s Cap & Trade program
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WCI Auction #16 – Ontario S&D
Fundamentals in Ontario remain short.
Assuming a minimal volume of offsets were
procured in the past two years, we expect
the Ontario market to be short by 5Mt in
2018.
- How will the fuel and gas distributors
react? We forecast their need to be ~97M
allowances in 2018. Previous PC leader
had references to the “good faith” concept.
- Industrials are likely to shy away from the
auction.
Contact Details
Michael BerendsManaging Director, Origination
mberends@clearbluemarkets.com
1 (416) 873-6320
www.ClearBlueMarkets.com
Nicolas GirodManaging Director, Markets
ngirod@clearbluemarkets.com
1 (347) 593-2130
22
copyright © 2018 ICIS analytics.icis.com 23
Want to chat more about carbon markets?
North American Carbon Market Seminar
When: October 11th, 2018, 12-5 p.m.
Where: Hotel Derek, Houston, Texas
What: Discuss important issues in the
WCI and RGGI markets
Got suggestions or want more info?
Email: Dan McGraw
dan.mcgraw@icis.com
analytics.icis.com
Team – contact information
Sunny Roe
Editor– North American Carbon Markets
Sunny.roe@icis.com
Dan McGraw
Senior Market Strategist– North American
Carbon Markets
Dan.McGraw@icis.com
Judith Schröter
Business Director- Carbon Markets Analytics
Judith.Schroeter@icis.com
Alina Mihai
Analyst – North American Carbon Markets
Alina.Mihai@icis.com
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